The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

Here's another thing for us all to worry about. The Baltic Dry Index has just hit a 29 year low. According to some this is the most important leading indicator in the world economy and given this slump in it we're all headed for a future disaster in terms of global economic growth. Now it's true that this is possible but in reality, unless you're a ship owner (unlikely I would have thought, it's very definitely a minority pursuit) there's not much to see here. What's being missed by some of the more excitable commentators is that markets have two sides to them, both supply and demand. Prices change in order to balance the two. If we had static supply of shipping and the Baltic Dry slumps then yes, that's a bad sign. If we've static demand and the price slumps then that's actually a good sign: growth is likely to be higher in future because transport will be cheaper.

The Baltic Dry Index dropped another 3% today to 590 - its first time below 600 since 1986 and not far from the all-time record low of 554 in July 1986. Of course, the absolute level is shrugged off by the over-supply-ists and the 'well fuel prices are down'-ists but the velocity of collapse (now over 60% in the last 3 months) suggests this far more than some 'blip' discrepancy between supply and demand - this is a structural convergence of massive mal-investment meets economic reality.

The Baltic Dry Index is seen as a leading indicator for world economic growth because it tracks the demand of moving raw materials such as coal, iron, steel and copper across the oceans.

The index measures the demand for moving these raw materials against the supply of ships that can carry them. The movement of raw materials is a useful guide to future economic growth because the raw materials are the building blocks for the world economy; coal is used to generate power, iron ore is used to make steel for housing and construction, and copper is needed for electrical wiring and plumbing.

Well, yes, if the fall in prices is because demand for shipping has fallen then perhaps we are in for some tough future times. But is this so? In the same article:

A longer term factor is that it takes more than two years to build ships, whereas demand can change very quickly. The world is suffering from a huge oversupply of mega ships that have been built to feed China's demand for commodities. Vale the biggest iron ore miner in the world has built a fleet of 35 massive iron ore carriers, to ferry iron from Brazil to China.

Well, no, it seems that the price fall is because of an increase in supply, not a fall in demand. And, of course, that means that shipping around those raw materials is going to be cheaper in the future. That's a good sign for future economic growth. Other things being equal cheaper transport will mean more trade and this more of that Smithian (or even Ricardian, dependent upon comparative advantage) growth.

It's Scott Sumner who keeps telling us that we should never reason from a price change. And his point isn't that price changes don't mean anything, it's that we want to know why the price change before trying to reason about it. It could be that a fall in the Baltic Dry means a reduction in demand for shipping. It could be that it means an increase in the supply of it. It would appear that it's the latter. And other than a few ship owners who might now regret having ordered more ships that's actually good news, not bad, for the global economy.